The presumed mechanism is that whilerevenues increase in a growing sector (or inflows of foreignaid), the given economy's currency becomes stronger ("appreciates") compared to foreign currencies (manifested in theexchange rate). This results in the country's otherexports becoming more expensive for other countries to buy, whileimports become cheaper, rendering those sectors lesscompetitive. While it most often refers tonatural resource discovery, it can also refer to "any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, andforeign direct investment".[3]
Natural gas concessions in the Netherlands (June 2008) accounted for more than 25% of all natural gas reserves in theEuropean Union.
The classiceconomic model describing Dutch disease was developed by economistsW. Max Corden andJ. Peter Neary in 1982. In the model, there is a non-tradable sector (which includesservices) and twotradable sectors: the booming sector, and the lagging (or non-booming) tradable sector. The booming sector is usually the extraction of natural resources such as oil, natural gas, gold, copper, diamonds orbauxite, or the production of crops, such as coffee or cocoa. The lagging sector is usuallymanufacturing oragriculture.
In the "resource movement effect", the resource boom increases demand for labor, which causes production to shift toward the booming sector, away from the lagging sector. This shift in labor from the lagging sector to the booming sector is calleddirect deindustrialization. However, this effect can be negligible, since e.g. thehydrocarbon andmineral sectors tend to employ few people.[4]
The "spending effect" occurs as a result of the extra revenue brought in by the resource boom. It increases demand for labor in the non-tradable sector (services), at the expense of the lagging sector. This shift from the lagging sector to the non-tradable sector is calledindirect deindustrialization.[4] The increased demand for non-traded goods increases their price. However, prices in the tradable sector are set internationally, so they cannot change. This amounts to an increase in thereal exchange rate.[5]
Within this framework, the spending effect is usually considered to be the main channel through which Dutch disease operates, while the resource-movement effect is usually seen as secondary. This is because, in the short run, labour is treated as the only mobilefactor of production, and since the extractive sector is assumed to becapital-intensive, it employs relatively few workers. As a result, direct shifts of labour from manufacturing or agriculture into resource extraction are thought to be limited, and deindustrialisation is instead explained mainly by real exchange rate appreciation following a spending boom. Yet the extractive sector does not rely on labour alone. It makes heavy use ofintermediate inputs such as fuel, electricity, water, and transportation, many of which cannot easily be imported and whose supply depends on other factors that are not perfectly mobile, including natural resources and capital. When resource extraction expands, it can therefore draw these inputs away from other tradable sectors, generating cost-push pressures when prices rise to clear the market. Moreover, because the production of these intermediate goods requires labour, the extractive sector also affects employment indirectly. Once these linkages are recognised, the resource-movement effect may be more significant than often assumed, even over the short run.[6]
Simple trade models suggest that a country should specialize in industries in which it has acomparative advantage; thus a country rich in some natural resources would be better off specializing in the extraction of those natural resources. However, other theories suggest that this can be detrimental, for example when the natural resources deplete. Also, prices may decrease, and competitive manufacturing cannot return as quickly as it left. This may happen because technological growth is smaller in the booming sector and the non-tradable sector than the non-booming tradable sector.[7] Because that economy had smaller technological growth than did other countries, its comparative advantage in non-booming tradable goods will have shrunk, thus leading firms not to invest in the tradable sector.[8]
Also,volatility in the price of natural resources, and thus the real exchange rate limits investment by private firms, because firms will not invest if they are not sure what the future economic conditions will be.[9] Commodity exports such as raw materials drive up the value of the currency. This is what leads to the lack of competition in the other sectors of the economy. The extraction of natural resources is also extremely capital intensive, resulting in few new jobs being created.[10]
There are three basic ways to reduce the threat of Dutch disease: (1) slowing the appreciation of the real exchange rate, (2) boosting the competitiveness of the adversely affected sectors, and (3) demographic adaptation. One approach is to withhold the boom revenues, that is, not to bring all the revenues into the country all at once, and to save some of the revenues abroad in special funds and bring them in slowly. Indeveloping countries, this can be politically difficult as there is often pressure to spend the boom revenues immediately to alleviate poverty, but this ignores broader macroeconomic implications.
Another strategy for avoiding real exchange rate appreciation is to increasesaving in the economy in order to reduce largecapital inflows which may appreciate the real exchange rate. This can be done if the country runs abudget surplus. A country can encourage individuals and firms to save more by reducingincome and profittaxes. By increasing saving, a country can reduce the need for loans to finance government deficits andforeign direct investment.
Investments in education and infrastructure can increase the competitiveness of the lagging manufacturing or agriculture sector. Another approach is toprotect the lagging sector by increasingsubsidies ortariffs. However, this could worsen the effects of Dutch disease, as large inflows of foreign capital are usually provided by the export sector and bought up by the import sector. Imposing tariffs on imported goods will artificially reduce that sector's demand for foreign currency, leading to further appreciation of the real exchange rate.[12]
It is usually difficult to be certain that a country has Dutch disease because it is difficult to prove the relationship between an increase in natural resource revenues, the real-exchange rate, and a decline in the lagging sector. An appreciation in the real exchange rate could be caused by other things such as productivity increases in theBalassa–Samuelson effect, changes in theterms of trade and large capital inflows.[13] Often these capital inflows are caused by foreign direct investment or to finance a country's debt. However, evidence does exist suggesting that unexpected and very large oil and gas discoveries do cause the appreciation of the real exchange rate and the decline of the lagging sector across affected countries on average.[14]
Indonesia's greatly increased export revenues after oil booms in 1974 and 1979.[17]
The effect ofNorth Sea oil on manufacturing sectors in Norway and the United Kingdom in 1970–1990.[18]
Analysts have argued that the United Kingdom's increasing reliance on the financial sector since the 'Big Bang' in 1986 prevented manufacturing growth.[19][20][21] A similar argument has been made regarding London's booming property market.[22] Concentrated almost exclusively on theCity of London, this financial sector growth has exacerbated regional economic differences such as theNorth–South divide despite the North's historically strong industrial and manufacturing base.Paul Krugman (among others) has written about the effect of a strong financial sector on UK manufacturing and a potential readjustment followingBrexit, should the financial sector reduce its reliance on London.[23][24][25]
Nigeria and other post-colonial African states in the 1990s.[26]
Venezuelan oil for certain periods throughout its history. A notable case occurred during the first presidency ofCarlos Andrés Pérez when he established Venezuela as arentier state.[27]
Post-disaster booms accompanied by inflation following the provision of large amounts of relief and recovery assistance such as occurred in some places in Asia following theAsian tsunami in 2004.[28]
Canada's rising dollar due to foreign demand for natural resources, with theAthabasca oil sands becoming increasingly dominant, hampered its manufacturing sector from the early 2000s until the oil price crash in late 2014/early 2015.[29][30]
The Philippines' strongforeign exchange market inflows in the late 2000s leading to appreciation of currency and loss of competitiveness.[31]
Chilean mineral commodity prices in the 2000s.[32]
Australian mineral commodities in the 2000s and 2010s.[33][34][35]
Nauru's heavyreliance on phosphate mining, combined with a lack of taxes and large government expenses, caused issues after the depletion of much of its reserves.[41][42][43][44]
^Ebrahim-zadeh, Christine (March 2003)."Back to Basics – Dutch Disease: Too much wealth managed unwisely".Finance and Development, A quarterly magazine of the IMF. IMF. Archived fromthe original on 4 July 2008. Retrieved17 June 2008.This syndrome has come to be known as "Dutch disease". Although the disease is generally associated with a natural resource discovery, it can occur from any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment. Economists have used the Dutch disease model to examine such episodes, including the impact of the flow of American treasures into sixteenth-century Spain and gold discoveries in Australia in the 1850s.
^abcdCorden, W. M. (1984). "Boom Sector and Dutch Disease Economics: Survey and Consolidation".Oxford Economic Papers.36 (3):359–380.doi:10.1093/oxfordjournals.oep.a041643.
^Liboreiro, Pablo R. (2025). "Intermediate inputs in Dutch disease. Copper in Chile".Structural Change and Economic Dynamics.72:427–437.doi:10.1016/j.strueco.2024.10.003.
^Krugman, Paul (1987). "The Narrow Moving Band, the Dutch Disease, and the Competitive Consequences of Mrs. Thatcher".Journal of Development Economics.27 (1–2): 50.doi:10.1016/0304-3878(87)90005-8.
^Armstrong, Angus (14 October 2016)."Pound in your pocket".National Institute of Economic and Social Research. Archived fromthe original on 1 July 2020. Retrieved26 March 2017.
^"Our Continent, Our Future"Archived 16 April 2007 at theWayback Machine, Mkandawire, T. and C. Soludo. "In most recent attempts to explain Africa's performance with growth and investment regressions, studies find that inaccessible location, poor port facilities, and the 'Dutch Disease' syndrome, caused by large natural-resource endowments, constitute serious impediments to investment and growth".
The dictionary definition ofDutch disease at Wiktionary